According to this article, paying taxes in Greece is practically voluntary. Shouldn’t this have led to more capital investment and general improvement of the society?
Also, is there any empirical evidence that lowering taxes leads to increased investment and capital accumulation (anywhere in the world, any time)? I know it seems like a naive question, but I am wondering if there are good representations of the answer.
Note that it is only the wealthy, and only by means of getting away with breaking the rules. That’s completely different than some place like Switzerland or Hong Kong with ultra-low tax rates according to the rules. You don’t use money that you’ve accumulated by breaking the rules to go open a business where you are at risk of having your feet held to the fire by the very same officials who earlier helped you break the rules: “Pay up, or I’ll rat you out and you’ll lose your business.” Such accumulations must be either hoarded or spent/invested outside the jurisdiction where they were accumulated by breaking the rules.
Clayton -
First that is not what I read coming out of Greece. The articles I read from sources like LRC show the tax collections becoming a more brutal process where the government singles out indviduals and comes down hard on them with the end result that all of the money extraced was not worth the process.
In the article, I did not see the cause or reasoning for the current Greek situation, although it may get mentioned later as I did not read it completely. The core cause is that the governments of Europe have stupidly forced their banks to make bad loans to Greece. Should Greece default then these large French, German and other banks will have to write off huge loans. So these bankers go to their friends in the EU and other capitals and lobby the politicians to keep the loans going to Greece. All the while the Greek government has not choice but to struggle through this mess and keep the gravy trains running as any cut backs will only go to pay off loans that they should have long ago defaulted on.
If you ask who would be stupid enough to enter this kind of situation the answer is only one group: Democratic Governments and their incredible willingness to promise today and be retired tomorrow.
As for capital investment, people need only do one thing to create real wealth: Earn more than you prefer to use and save the difference. Currently in Greece the people are stuck bewteen two hard places. They have to go through gyrations to keep their wealth from the eyese of the tax collectors, and then they have no vehicle to save the money as the government has its eyes on almost all financial assets except of course the vast Grey or worse oversized Black markets going on in the country. And what will a black or grey market pay when the legitimate markets are paying less than 2% and your own government bonds are completely worthless?
I apologize. I also did not read the article completely and did not realize it was describing the 19th-century situation.
But I think Clayton’s point still stands, regardless.
I also think that you’re going about this fundamentally incorrectly in the OP. The affect that taxation has on capital accumulation depends not only upon the level of taxation, but also what is taxed and the direction of government spending.
What do you mean by the ‘direction of the government’s spending’?
Some government spending will produce more useful capital than others. Implicitly government spending on medical supplies should increase some “useful” capital that might improve the lives of citizens whereas military spending may well just draw capital away into a total waste. Some government spending (primarily public works) could also be considered as accumulating capital in and of themselves, although Rothbard would swat me for saying so.
Also government employment of large numbers of people would drive up wages from what they would be, decreasing the production of all types of goods, both consumer and producer.
Whoaaa hold the boat Neodoxy.
Are you saying that robbing Peter to pay Paul will increase capital, provided Paul uses the money to do something “useful” according to your definition?
You leave out the good old broken window fallacy. What is the hidden cost?
Firstly, in order to have the dollars to “improve the lives of citizens” it first has to take it from the same citizen by force (where that same dollar was very happily improving the lives of citizens anyway) then they have to dilute it and siphon off the money to hundreds of little government beaurocrats that each take a cut and spend it on maintaining their agency. For instance your “medical supplies department” might have a thousand employees each siphoning off a salary, bonusses and retirement benefits from that dollar.
At the end of the day there might be 10c left to spend on your “useful” capital, besides nobody can calculate how much capital would have been added over the years if that dollar was left in circulation. Nor can they calculate how many private “medical supply” vendors now went bankrupt because they could not compete with the government.
I also have issue with your classification of “useful” capital. There are only two types of trading. One is voluntary by choice and it is what the capitalist system is based on. It does not matter what any outsider thinks of the “virtue” of the trade.
The other is coercive where a robber or the mafia or the taxman steals it. It contracts the market, no matter what you think about the wiseness or usefullness of how they spend it.
It is not as if taxes are the only variable in determining capital investment. If the tax rate was zero I still would not invest a dime in Greece.
Albert,
I think you misunderstand what I am saying here. Above I put the term “useful” in quotation marks exactly to indicate the subjectivity of what we are talking about. Inevitably the term “useful” is entirely subjective exactly because what has a use, what is worthwhile varies from person to person. I don’t think that the production of heavy metal posters is useful while someone else might not think the production of books is useful.
From this I pulled something which is ultimately arbitrary and subjective, but also something that many around here would agree upon: that some government spending is more useful than others. I think it’s hard to disagree that digging holes in the desert is as useful as producing medical supplies, nor that the extensive and unnecessary military operations abroad and the resources it consumes. We can at least say that one is already provided to some extent by the market, that it follows a fair degree of consumer demand. This is more useful in talking about how government taxation affects capital growth. If the government raises a large amount of tax revenue and spends it building things which are utterly useless and which take up a large amount of resources, then capital has clearly been squandered, while if it funds the production of cakes, then this will drive capital into the cake industry, but at least it won’t result in as great a capital consumption as would have otherwise occurred by the valuations of the market.
You can attack the fact that this is based upon “my values” but this would then imply that government spending that goes towards buying up factories and blowing them up has the same affect on capital accumulation as the government building a roadway.
Neodoxy,
No, I think I understand what you are trying to say, I just disagree.
Bastiat said long ago, that the difference between a good economist and a bad economist is: the second only takes anto consideration “that which is seen” (like the hospitals and bridges built by government)
And the good economist considers all the effects, before during and after the act.
You start your argument with “If the government raises a large amount of taxes” … then it can choose to spend it either “wisely” or frivolously and this will
impact the economy and capital investment. What you cannot see is the number of hospitals that would have been built if the government did not tax the citizens.
That is unseen and incalculable.
But before a government can collect a large amount of taxes, it has to take that exact amount of money out of the current or future economy. It has to "subtract "capital investment out of circulation in the free market to create the impression that it is adding to capital investment.
Governments cannot generate productive income, it can only redistribute to less efficient avenues.
Then after they do that, they further corrupt the economy and capital investment by interfering and competing with free market forces. This increases cost to consumers, lowers quality to consumers in exactly those markets they are trying to “help” and it contracts or even kills marginal competitors right out of the market, reducing furure capital investments.
Further they are incapable of spending wisely, because they do not compete for customers like the rest of us and by definition they are notoriously inefficient. Only Keynesians believe that there is such a thing as “government investment”
Flying Axe,
There are many examples of where lowering tax rates improved the economy and even increased tax revenue, because more people were employed and paying the lower rate and causing the economy to expand. Unfortunately as with any history, people with opposing interpretations will just say you are wrong and find other reasons to explain it.
Albert,
“No, I think I understand what you are trying to say”
I think you very nearly understand what I’m trying to say, but you’re missing one essential element that makes all the difference: I am saying that the government can spend in ways that cause more or less distortions to the productive structure and which are more or less effective at satisfying human desires. This does not mean that the government can provide services or increase capital accumulation in a more positive way than the market would.
This was initially relevant because of FlyingAxe’s quesion. Both the level and the direction of government spending matter to the effect government taxation will have on the capital structure. A large military will probably not have as negative an effect on the capital structure as large roadway projects. It is exactly the unseen that makes both actions distortions.